In a recent Economic Letter that seemingly has not gotten much attention, the Federal Reserve Bank of San Francisco discussed how it considers climate change as it relates to financial and macroeconomic stability. The Letter notes a fundamental issue of whether and how the direct costs of climate change, and the costs to a low carbon economy, are priced into asset values. It goes on to state, “financial firms with limited carbon emissions may still face substantial climate-based credit risk exposure, for example, through loans to affected businesses or mortgages on coastal real estate. If such exposures were broadly correlated across regions or industries, the resulting climate-based risk could threaten the stability of the financial system as a whole and be of macroprudential concern.” The Letter concludes by stating: “Many central banks already include climate change in their assessments of future economic and financial risks when setting monetary and financial supervisory policy. For the Fed, the volatility induced by climate change and the efforts to adapt to new conditions and to limit or mitigate climate change are also increasingly relevant considerations.”
